The Problem with FICO and Mortgages . . .

Where was Fair Isaac when subprime mortgage collapsed?  Aren’t its credit scores reliable?  Ah, er, hmm - It’ll get back to us.

Let’s look at a September 19, 2007 article from Forbes (no link available; paid subscription required).  Fair Isaac’s 01/07 study concluded that a high scoring borrower with a no money down mortgage is just as likely to default as a low scorer with 40% down.  Lehman Brothers sold a portfolio in 2006 with borrowers averaging 631 (the upper range of subprime borrowers) and a 5% default prediction.  18 months later, the default rate was 15% or three times higher .

Fair Isaac’s vice president says “FICO scores an individual’s risk over time.  It’s not an assessment of the riskiness of the loan made,” and that creditors should not be making lending decisions solely on FICO scores.

In my personal experience, a local lender with a quarter point higher interest is well worth that extra cost.  You get a person deciding on your loan, not a computer, and you get real service down the road if needed.